SERVING THE QUANTITATIVE FINANCE COMMUNITY

 
User avatar
Late
Topic Author
Posts: 16
Joined: August 25th, 2007, 9:49 am

Prizing of CMS options

December 11th, 2007, 12:36 pm

HiI am a new writer in these forums, but have been searching the discussions for some time now...I am starting to do my master thesis on mathematics ( have also read computer science and C++ programming) quite soon and I have been thinking of the subject for some time. I have worked for some time in a derivatives desk in a local investment bank from where I got quite a lot of practical experience from derivatives (especially interest rate ) products. I think that the prizing of CMS swaps and swaptions would be an interestng subject for my master thesis. I own quite a many (financial) math books, but none of them covers CMS products in great detail. What my instructors have said, there are not much of academic releases which goes in depth of this subject.Few questions for CMS products:1. What is the (market) practice for prizing CMS swaps and -derivatives?This would help me to know where to start. 2. Does anybody know a book which covers the prizing of CMS in more detail than for example Hull's book? Feel also free to comment the subject, what you think about the difficulty. Thanks a lot!
 
User avatar
gjk77
Posts: 54
Joined: October 8th, 2005, 6:04 pm

Prizing of CMS options

December 11th, 2007, 3:33 pm

I'd suggest you start with Hagan's paper, "convexity conundrums: Pricing CMS Swaps, Caps and Floors", Wilmott, 2003.There is a thesis which you might find useful, "An examination of the convexity correction technique in the pricing of constant maturity swaps", Nevena Selic, 2003, not sure of the university.Also Hunt and Kennedy's book has some treatment of CMS.
 
User avatar
gc
Posts: 673
Joined: September 21st, 2002, 10:08 pm

Prizing of CMS options

December 12th, 2007, 12:55 am

First of all good luck with your studies and with your thesis.The family of CMS products is definitively a good topic to explore. I'd subdivide the instruments in two classes: the first one including those that can be priced by replication (CMS swaps, caps&floors) and those that cannot (e.g CMS spread options, range accruals, callable products).For the first class the article by Hagan and the book by Hunt suggested by Gjk77 are a very good starting point. In general many things are known about these so it's a good start for a thesis because it allows to cover market practices and even if you won't add anything new in terms of research, there is value proving that you understood the concepts behind the pricing.Then you can give a bash to pricing those other CMS products that you cannot price by replication and whatever you are going to write, provided that your arguments are sound, nobody can tell you you are wrong. Looking at market prices (at least for CMS spread options) there is a difference in quotes coming from different banks, which means that the prices are still widely market dependent, so there isn't a correct (or well established way) to price them yet.In terms of books I don't think there is much stuff at all, but there is a large collections of articles. I'd would add to Hagan's:Fabio Mercurioand the three files attached.You may find interesting Nevena Selic's thesys too...
Attachments
CMS.zip
(645.39 KiB) Downloaded 11 times
Last edited by gc on December 11th, 2007, 11:00 pm, edited 1 time in total.
 
User avatar
cemil
Posts: 221
Joined: September 16th, 2005, 7:44 am

Prizing of CMS options

December 12th, 2007, 9:06 am

you can find the "An examination of the convexity correction technique in the pricing of constant maturity swaps", Nevena Selic at the Witwatersrand, Johannesburg UniversityThe link is: http://web.wits.ac.za/Academic/Science/ ... /Research/
 
User avatar
manolom
Posts: 238
Joined: March 14th, 2006, 2:52 pm

Prizing of CMS options

December 12th, 2007, 10:08 am

Further reading: A Martingale Result for Convexity Adjustment in the Black Pricing Model - Eric Benhamou The Future is Convex - Peter Jackel, Atsushi Kawai Convexity Conundrums Risk, pages 60–61, March 1997 - G. Kirikos and D. Novak Forward CMS rate adjustment - Risk, March 2001- D. Pugachesvky
 
User avatar
Late
Topic Author
Posts: 16
Joined: August 25th, 2007, 9:49 am

Prizing of CMS options

December 14th, 2007, 8:12 am

Thank you very much for all of you. I am going to start from the Kennedy's book which has promising contents. Quite expensive book though it seems It is nice there are also some academic releases
ABOUT WILMOTT

PW by JB

Wilmott.com has been "Serving the Quantitative Finance Community" since 2001. Continued...


Twitter LinkedIn Instagram

JOBS BOARD

JOBS BOARD

Looking for a quant job, risk, algo trading,...? Browse jobs here...


GZIP: On